The balance of trade (or net exports, sometimes symbolized as NX) is the difference between the monetary value of exports and importsof output in an economy over a certain period. It is the relationship between a nation's imports and exports.[1] A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap. The balance of trade is sometimes divided into a goods and a services balance.
Early understanding of the functioning of balance of trade informed the
economic policies of Early Modern Europe that are grouped under the heading mercantilism. An early
statement appeared in Discourse
of the Common Weal of this Realm of England, 1549: "We must always
take heed that we buy no more from strangers than we sell them, for so should
we impoverish ourselves and enrich them."[2]Similarly
a systematic and coherent explanation of balance of trade was made public
through Thomas Mun's c1630 "England's
treasure by forraign trade, or, The balance of our forraign trade is the rule
of our treasure"[3]
The balance of trade forms part of the current account, which
includes other transactions such as income from the international investment positionas
well as international aid. If the current account is in surplus, the country's
net international asset position increases correspondingly. Equally, a deficit
decreases the net international asset position.
The trade balance is identical to the difference between a country's
output and its domestic demand (the difference between what goods a country
produces and how many goods it buys from abroad; this does not include money
re-spent on foreign stock, nor does it factor in the concept of importing goods
to produce for the domestic market).
Measuring the balance of trade can be problematic because of problems
with recording and collecting data. As an illustration of this problem, when
official data for all the world's countries are added up, exports exceed imports
by almost 1%; it appears the world is running a positive balance of trade with
itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The
discrepancy is widely believed to be explained by transactions intended to
launder money or evade taxes, smuggling and other visibility problems. However,
especially for developed countries, accuracy is likely.
Factors that can affect the balance of trade include:
§ The cost of production
(land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy;
§ The cost and availability
of raw materials, intermediate goods and other inputs;
§ Exchange rate movements;
§ Multilateral, bilateral and
unilateral taxes or restrictions on trade;
§ Non-tariff barriers such as
environmental, health or safety standards;
§ The availability of adequate
foreign exchange with which to pay for imports; and
§ Prices of goods
manufactured at home (influenced by the responsiveness of supply)
In addition, the trade balance is likely to differ across the business cycle. In
export-led growth (such as oil and early industrial goods), the balance of
trade will improve during an economic expansion. However, with domestic demand
led growth (as in the United States and Australia) the trade balance will worsen
at the same stage in the business cycle.
Since the mid 1980s, the United States has had a growing deficit in
tradeable goods, especially with Asian nations (China and Japan) which now hold
large sums of U.S debt that has funded the consumption.[4][5]The
U.S. has a trade surplus with nations such as Australia. The issue of trade
deficits can be complex. Trade deficits generated in tradeable goods such as
manufactured goods or software may impact domestic employment to different
degrees than trade deficits in raw materials.
Economies such as Canada, Japan, and Germany which have savings surpluses,
typically run trade surpluses. China, a high growth economy, has
tended to run trade surpluses. A higher savings rate generally corresponds to a
trade surplus. Correspondingly, the U.S. with its lower savings rate has tended
to run high trade deficits, especially with Asian nations